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Eurex and ISE to create largest transatlantic derivatives marketplace

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Eurex and International Securities Exchange (ISE) have signed a definitive agreement under which Eurex will acquire ISE for approximately USD 2.8 billion in cash, or USD 67.50 per share.

Eurex and International Securities Exchange (ISE) have signed a definitive agreement under which Eurex will acquire ISE for approximately USD 2.8 billion in cash, or USD 67.50 per share. The combination will be implemented by way of a merger and is subject to shareholder and SEC approval.

The transaction will create the largest transatlantic derivatives marketplace with significant USD and Euro product coverage and with significant operations and revenues in both the US and Europe, the two largest markets based on market capitalization. It will further strengthen Eurex’s position as the leading global derivatives marketplace and will create a market leader in individual equity, equity index and interest rate derivatives worldwide with a combined overall trading volume of 2.1 billion contracts in 2006.

Eurex’s and ISE’s complementary member bases and product portfolios provide significant growth opportunities across asset classes and national boundaries. Further upside potential stems from joint product and business development opportunities. ISE will continue to operate as a separate entity under SEC regulation in its current governance structure and under the ISE brand. ISE’s full management intend to remain in their positions.

Deutsche Börse CEO Reto Francioni said: ‘This transaction further expands Deutsche Börse’s leading position in the fast growing global derivatives markets. The agreement is a strategic milestone for us that will further fuel our strong growth prospects and create significant value for shareholders. This transaction underscores our approach to combine strong organic growth with value creating acquisitions.’

‘ISE and Eurex are partners with an excellent strategic fit. Both are innovators of electronic trading in their time zone, sharing the same management culture. We look forward to combining our strengths to create a global marketplace,’ said Andreas Preuss, CEO of Eurex and a member of the executive board of Deutsche Börse. ‘The combination of ISE’s leadership position in the U.S. equity options market with Eurex’s global position in Euro denominated fixed income, index and equity derivatives will provide significant benefits to our customers.’

‘In founding ISE almost 10 years ago, we transformed the U.S. options market,’ said David Krell, President and CEO of ISE. ‘Our innovative products, electronic trading model, technology, market structure and entrepreneurial organization have enabled us to remain at the forefront of the options industry. Our principle strategic objective is to further grow our business both in terms of new products and new markets and in partnering with Eurex, we will be able to achieve our goal. By completing this transaction, we will be positioned to build upon ISE’s successful business model and to solidify our future as an integral component of the largest transatlantic derivatives marketplace.’

Gary Katz, Chief Operating Officer of ISE, added, ‘We have known the management team of Eurex for some time now and have developed a strong working relationship with them.  We also share a common vision that the exchange model is evolving toward global, multi-asset class, electronic marketplaces and our combination will allow both of our organizations to remain at the forefront of this competitive industry. Our cultural fit and common vision will serve as the basis for our successful future collaboration.’

‘Our contribution to the ISE acquisition demonstrates the SWX Group’s strategic commitment to leveraging and expanding its international partnerships," said Peter Gomez, Chairman of the SWX Group.

Jürg Spillmann, Head of the SWX Group Executive Committee and Deputy CEO of Eurex added: "The expansion of the combined liquidity network of the fully electronic exchanges Eurex and ISE will further enhance the leadership position by our joining forces.’

ISE is the world’s largest equity options exchange, providing electronic trading in USD denominated equity options, index options and FX options. ISE’s trading volume in equity options has grown at a 55 percent CAGR over the last five years, outperforming the market for U.S. equity options. With a share of 32 percent of the overall U.S. equity options market, ISE is themarket leader. ISE traded 600 million contracts in 2006 and has 164 member firms in the U.S. ISE recently launched a stock exchange and operates an alternative markets platform, which will be further enhanced as part of the Eurex group.

Eurex, jointly owned by Deutsche Börse and SWX Swiss Exchange, has a diversified portfolio of Euro denominated fixed income, index and equity derivatives. Since its inception in 1998 Eurex has grown to become the largest derivatives market in the world. Eurex lists some of the world’s most actively traded derivatives, including the global benchmark products Euro Bund future and Dow Jones Euro STOXX 50 future. Eurex has 393 members in Europe, the US and Asia and traded 1.53 billion contracts in 2006.

The merger of Eurex and ISE combines two of the fastest growing players in the financial services industry, both with proven track records of innovation. ISE pioneered electronic trading in the fast growing U.S. equity options market and continues to show strong, positive financial performance on the back of market leadership in the U.S.

ISE’s extensive membership base will significantly strengthen Eurex’s position in the U.S.: 164 registered U.S. broker-dealers are ISE members while Eurex currently has 63 U.S. members. It also adds 600 million traded contracts to the number of contracts originated in the U.S.; at Eurex, 112 million contracts originated in the U.S. ISE’s product portfolio is fully complementary to that of Eurex and with the acquisition Eurex is investing in a high growth business while further balancing its product portfolio.

The combined group will be the largest transatlantic derivatives marketplace with powerful distribution capabilities in two of the world’s most important capital markets. Its wide range of both USD and Euro denominated products will be unique in the market: the combination will be home to the Euro zone interest rate and equity index benchmark derivatives products and will offer options on all major U.S. and European companies. Combining the two companies offers huge growth opportunities through cross selling of existing products in both markets, as well as through the introduction of new products in the future.

The combination will create significant value for Deutsche Börse shareholders and SWX Swiss Exchange. Total estimated pre-tax synergies of USD 50 million p.a. have already been quantified. 50% of the total synergies will be achieved in 2010 and full run rate synergies in 2012. Of the total some USD 15 million p.a. are attributable to efficiency gains. An additional approximately USD 35 million p.a. come from revenue synergies mainly through the cross selling of existing products. Both partners strongly believe that the joint product development experience and capability will result in further growth opportunities across asset classes and geographies. This additional potential is not included in the total

The combination is well positioned to further expand its global network of partners. It will feature the broadest geographic and product coverage, strong functional and service knowledge and cutting-edge technology.

In the merger, Eurex will pay ISE shareholders USD 67.50 in cash for each of their shares of ISE stock. The combination will be implemented by way of a merger between ISE and a subsidiary of U.S. Exchange Holdings Inc., itself a Eurex subsidiary. The transaction is subject to approval by the holders of a simple majority (50 percent plus one share) of ISE outstanding common stock at a special shareholder meeting to be held as soon as practicable, receipt of regulatory approval by the U.S. Securities and Exchange Commission and other customary closing conditions. The partners expect the transaction to close in Q4/2007. ISE expects to continue to pay a regular quarterly cash dividend in the pre-closing period.

Eurex will be the acquiring entity with its two parent companies Deutsche Börse AG and SWX Swiss Exchange providing the necessary financing. Deutsche Börse will contribute 85% of the total purchase price and SWX 15% thereby remaining in line with the economic interests that both companies have in Eurex.

Deutsche Börse is planning to finance its share of the purchase price initially through a bridge loan facility of approximately EUR 1.5 billion (approx. USD 2 billion) and cash on hand at the time of closing. This bridge loan will be taken out through retention of future earnings (approximately EUR 200 million (approx. USD 270 million) and a mix of senior and hybrid debt (approximately EUR 1.3 billion, approx. USD 1.77 billion). This long term financing structure assumes implementation of the ringfencing structure currently under development as reported at the annual results conference in February 2007. With this structure Deutsche Börse moves from a net cash to a net debt position thereby reducing its cost of capital and thus increasing its capital efficiency. Deutsche Börse also plans to continue with its progressive dividend policy. Share buy backs under its current capital management program will start again once financial ratios are restored.

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